Easy downfall: Lazy forecasts. Photo: Glen Hunt
HEARD an economist on the TV this week saying he was confident that there would be a Christmas rally in the equity market.
Yeah, right. And just where did you dig up that little bit of wisdom because, unless I'm terribly mistaken, we're over five months out from Christmas and on the verge of a European debt collapse. Clearly another unreasonably optimistic financial professional pulls yet another ho-hum forecast out of that bottomless pit of unfounded financial opinion, his arse.
Of course, an opinion is better than having no opinion, but let's just draw a line in the sand here, let's just stop treating customers like idiots by expressing confidence in lazy opinions that any drone financial observer could make. On the verge of a potential European debt crisis, this is not the time for idle arrogance; it is time to show some respect for investors who have already lived through one GFC.
I know optimism sells but rather than make hollow forecasts about the future, let's look back instead at the "Lessons from the (last) Global Financial Crisis", a popular broker's presentation topic in 2009, a talk that was far too late to be useful, of course, but still served the purpose of making us look terribly clever through the erroneous implication that we had known it was all going to happen well before it ever did. Those talks may now have some currency. Here's a pré´cis of my talk at the time. "Lessons from the Global Financial Crisis". To recap, main points only:
Capital is more important than income. Protect capital at all costs. This comment is born out of our experience with the bank sector in the GFC. We all held onto the banks for income, telling everyone the dividends would be OK. We lost 55 per cent of our capital. A focus on the income from equities rather than the importance of the capital tied up in them was a big mistake. Never again. Capital first. Income second. The only defensive stock is cash.
No room for faith. I know many of you will disagree, but the concept of "Set & Forget" died in the last GFC. You have to protect yourself from events like 2008 and you cannot do it with your head in the sand about the "Long Term". Just ask any Japanese retail investor. Be prepared to sell because no one has enough money to shut the market for 10 years and not worry about it, that's bollocks. And anyway, you can always buy back. Research let us down. It did not lead. It was biased to optimism. There was no help there.
You cannot believe companies. Even companies acting in good faith did not understand their own exposures to sub-prime. How many understand their exposure to companies exposed to companies exposed to companies exposed to a European debt default. Not many.
Run stop losses on all holdings, no matter what you consider to be the long-term prospects. You need some, any, discipline and it needs to be developed in advance. Markets fall three times faster than they rise. If the worst happens you will need a pre-conceived mechanism because by the time you consider all the options it'll be over. You need to sleep.
Listen to the market. No one predicted the GFC until it was too late. The only signs we could trust came from the charts, the share prices and the commodity prices, not the propaganda. The market talks and we should listen. Develop a useful respect for the technical picture. Yes it has its weaknesses but it also tremendous strength. A share price doesn't lie and a falling share price and especially a falling market tells you something and it's not "buy me".
The decision to sell has to be yours. The financial industry is there to suck you in not let you out. If you think it is time to sell your financial professional will resist you with the lines that cost you so much in the last GFC, the two most notable being "The market has already fallen" and "It'll be all right in the long term". If it comes to it the decision to sell will have to be yours and you will have to persevere to get it done.
May you never need the wisdom of this hindsight.
Marcus Padley is a stockbroker with Patersons Securities and the author of stockmarket newsletter Marcus Today. For a free trial go to marcustoday.com.au - His views do not necessarily reflect the views of Patersons.
